Anniversary special: Is FDI in hydro justified?

 An old debate continues to fester in Nepal: Do we need foreign investment in hydro­power? There has always been a ten­dency in the country to please foreign inves­tors. The past experience of foreign invest­ment in hydropower had proven costly. But thanks to lucrative commission high-level state officials pocket from them, we are surrender­ing one after another hydropower project to foreigners—and for questionable returns.

The former CPN-UML contributed to the cancellation of Arun III. Instead, we signed dollar agreements for Khimti and Bhote Koshi, and the country will continue to pay for these projects in dollars for at least another decade. All major political parties were united in this open loot. There was a lot of hullaballoo over building Budhi Gandaki with Nepal’s own money, and even a petrol tax was raised for the purpose (with the total coming to Rs 37 bil­lion). Yet the project was ultimately awarded to a foreign company via unscrupulous mid­dlemen. Even if political parties disagree on many things, they are one when it comes to pocketing big commissions. The same hap­pened with Budhi Gandaki. Nearly all the projects undertaken with foreign money have been made deliberately expensive. When the World Bank’s IFC entered Khimti, even the PPA rate was revised. These projects given to foreigners generate only a third of the installed power capacity, and yet the state will continue to pay them for 30-35 years.

In this context, a few weeks ago, there was a financial agreement on Trishuli-1. The project would reportedly generate 1,00MW during the winter, and 216MW in the rainy season. Initially estimated at Rs 35 billion, the final project cost ballooned to Rs 65 billion.

Of that money, around 80 percent will be repatriated. Some construction materials and semi-skilled laborers will be Nepali, and some electricity would be added to the grid. But this project has also hindered the entry of Nepali investors into the sector. The PPA of Nepal’s private sector has been stopped after the proj­ect’s ‘connection agreement’. The problem of adjustment of its monsoon-time electricity will be a headache, as NEA has to pay in dollars for spill energy. Interestingly, in this project, the longer the electricity is sold, the more costly it will get.

Certainly, there can be no investment with­out guaranteed return. But we need the kind of investment that benefits both the investors and the country. Here, all benefits accrue to foreign investors. The state is forced to guar­antee investment, provide services, and limit its investment in other neighbors.

Yet domestic investors cannot repay their loans even after generating much electricity. If only 10 percent of the facilities provided to for­eign investors are given to our own investors, plenty of investment can be generated from within the country itself. Yet no such conces­sion is made to potential domestic investors. For instance, the stated government policy goal of getting domestic investment to reduce energy emergency has not been implemented even after it was passed by the parliament. This double standard is at the heart of our hydropower crisis.

Whenever the private sector tries to enter hydropower, the government functionaries rise up to thwart it. A cabinet decision is needed just to cut down a few trees. It takes years to conduct Environment Integrity Index (EII) or Environmental Impact Assessment (EIA). There are hurdles every step of the way, from land acquisition to custom clearance. Generally, there are no such hurdles in the case of foreign investment.

Where we really need foreign investment is in reservoir-based projects. But seldom do the private sector enter these projects as there is no profit. (For instance, Budhi Gandaki’s pay­back period is assumed to be around 18 years.) The private sector cannot pay for West Seti: There is again a long process of payback and the market is uncertain. So why are foreign companies investing in Nepal?

As a Chinese company is interested in Tamor (667MW), Nepalis are excited. But the kind of conditions the Three Gorges forwarded in the case of West Seti will also be replicated in this case, as there is no fixed market for it. Will the Nepal Electricity Authority buy its power tomorrow? At a time the Three Gorges did not trust the NEA with West Seti, in which the NEA itself was a partner, how can it trust the NEA in other projects? This only risks hold-up of licenses.

As it is confident that nobody will come for­ward to build Tamor easily, the BPC has been sitting on Kabeli A (37 MW)—which could be sunk by the building of Tamor—as it expects compensations even without building it. The government has just sold Tamor to a Chi­nese company, with an MoU signed between Nepal’s Hydroelectric Investment Develop­ment Company Ltd. (HIDCL) and Power China Corporation. But the project’s future remains mired in uncertainty.

In Tamakoshi III (650 MW), Norway’s SN Power could have come. This world-famous company had no shortage of equity. But why didn’t it? How can a company backed by a dubious broker named ‘Hey Narayan’ enter a project when the SN Power dared not? Our rulers know foreign investors are not attracted to Nepal’s hydropower. If a PPA is to be opened in the models of Khimti, Bhotekoshi, Upper Marshyangdi, and Chilime, there will be a surfeit of investment.

If there is an agreement on division of spoils among political parties, such agreements will continue to be struck. But where will the power they generate be sold? The political leaders who give orders don’t even need to sign anywhere to be eligible for such commis­sions; they can just verbally instruct the offi­cials of the Investment Board or the Ministry of Energy. Unless there is a mandatory provision of signatures of the leaders who issue such diktats, they will continue to sell our rivers.

Again, we need investment in reser­voir-based projects. But these are not finan­cially attractive. When the private sector does not step forward, the government should step in. We import electricity worth Rs 24 billion, send out even more money in the import of petroleum, and yet we don’t have many ave­nues to increase our exports and reduce our trade deficit. Reducing imports is tantamount to increasing exports. Yet we have no policy to replace imported energy and petroleum with our home-generated power.

Our political leaders seem to have little time to think about the country’s long-term and strategic interests. If they did, the mighty two-third government with a finance minister with a sterling resume would have started construction of reservoir-based projects with state investment. Yet we are forced to continue to indulge in gimmicks like re-exporting palm oil to India to reduce our trade deficit.

There is neither energy security, nor have domestic investors gotten justice. There is a kind of prohibition on the domestic private sector from investing in common (run-of-the-river) projects. Yet foreign investment in such projects is welcomed. We need foreign invest­ment only when our domestic resources are inadequate. If the government has a policy of building reservoir-based projects with the help of private sector, we need not always look up to foreigners. Only then will the country be self-sufficient in energy.

When will the NEA make Upper Arun and Sunkoshi, and when will they start produc­ing power? We also don’t know about the future power demand when they finally come on stream. Thus a kind of darkness has descended on Nepal’s power sector as there is no fixed goal, or imagination. We con­tinue to import electricity despite our huge production potential, we cannot consume the generated power, and we continue to rejoice at foreign investment. How long will this trend continue?

The state does not want to invest in reser­voir-based projects as the ruling parties have to dole out money for its leaders and cadres by entrusting other kinds of projects to for­eign companies. When will our leaders learn to think beyond their immediate interests?

The author, Editor with Annapurna Post, is a veteran hydropower analyst